Analysis of Japan's Ongoing Economic Crisis and Its Aging Population Problem

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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter accountwith plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?

Thursday, June 19, 2003

The Liquidity Trap: A Sticky Problem

Brad has a number of posts this week on the liquidity trap problem (and here and here . Two points occur to me: firstly, is it more than a merely semantic point whether we are 'fast approaching' or "already caught in the orbit" of one; and secondly whether (as Joerg asks me) the name is not a misnomer, wouldn't 'viscosity trap' be a better description? Meantime, John Irons recent post is as good a start for the 'unintitiated' (we still await the 'guide for the perplexed') as any you will find:

The recent FOMC statement by the Federal Reserve (Fed) included the line that "... the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level" (emphasis added.) It occurred to me that this statement might be a little confusing - isn't inflation supposed to be bad? Why would a fall in inflation be "unwelcome"? The answer has to do with what economists call a "liquidity trap." (Note: the full analysis of a liquidity trap is considerably more complicated than below, but this should convey the basic idea.)

The basic argument is that the interest elasticity of money demand increases, and monetary policy becomes less effective, when the nominal interest rate approaches zero. Ok, here's the English version...........
Source: ArgMax
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What Is Japan Economy Watch?

Japan Economy Watch is a weblog run by Claus Vistesen, Scott Peterson and Edward Hugh which follows the day to day progress of the Japanese economy. The principle focus of the weblog is Japan's long term growth and deflation problem, and many of the posts examine the issue of the sustainability of Japanese public finance in the light of the weak domestic consumption record which appears to be related to the ageing question. Ageing produces a continuing and ongoing rise in median ages due to continuing low fertility and the rapid increases in life expectancy which Japan has been experiencing. Detailed arguments concerning the evolution of the Japanese economy can be found in the posts indicated under the "Worth A Read" heading which can be found on the Weblog Home Page